Is There An Investment Opportunity In Luxury Stocks?

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Key Takeaways:

• In recent weeks, The Juice has been assessing the state of the consumer at various levels. 
• Several themes emerged when we sampled recent earnings and outlooks from a handful of companies in the broad luxury retail space. 
• As the pandemic eased, pent-up demand fueled meaningful sales increases, leading to impressive earnings’ beats. 
• In the near-term, these retailers are cautiously optimistic as they navigate headwinds such as inflation. 

Given our recent discussions on cash-strapped consumers turning to debt and people making $250,000 living paycheck to paycheck, The Juice thought it made sense to check in on a sampling of luxury stocks. 

So we hit up our proprietary Trackstar database of the stocks investors are searching for and created our own broad luxury category. We landed on five stocks as a pretty solid gauge of the luxury/affordable luxury space. 

For each stock, The Juice looks at recent earnings and sees what the company has to say about the state of its consumer. 

#1 Restoration Hardware (RH)

Restoration Hardware, or RH, sells high-end home furnishings online and via brick and mortar stores in the US, Canada, and UK. 

Earnings: RH crushed its most recent earnings. Earnings per share (EPS) came in at $7.78, beating estimates by $2.42. The company topped revenue estimates by $32.5 million at $957.29 million. An 11.2% year-over-year increase. However, RH issued weak guidance, causing its stock to tumble. 

RH on the consumer: On its June 2 earnings call, RH said it’s seeing a slowdown in the pent-up pandemic spending that has driven its recent growth. The company also thinks inflation is higher than the reported numbers. It calls these things short-term headwinds and has confidence in its long-term growth story. 

#2 Ralph Lauren

Ralph Lauren sells apparel and lifestyle products in the affordable luxury category. 

Earnings: Like RH, Ralph Lauren beat estimates handily when it reported earnings in late May. However, it took a hit on a couple analyst downgrades after the report. They’re worried about margins, particularly due to increased promotions in the US and UK. 

Ralph on the consumer: On its earnings call, Ralph continually referred to its consumer as resilient. For example:

One, our consumer remains strong around the world, all right? And as we recruit new consumers, you saw this past quarter, we recruited 1 million new consumers, 5 million over the past fiscal year. We’ve been fundamentally pivoting our base towards higher-value full-price consumers who are less promotion/price sensitive. 

#3 Tapestry

Tapestry is the parent company of three major luxury brands: Kate Spade, Coach, and Stuart Weitzman. 

Earnings: Also, like RH, Tapestry beat profit and revenue estimates for its fiscal Q2/2022 earnings, but reported relatively weak guidance. 

Tapestry on the consumer: Here are the key things the company said about its core consumer on its May earnings call: 

• Short-term slowdown in China due to COVID lockdowns. 
• Elsewhere, particularly in the US and Europe, there’s strong consumer demand as we reenter normal life. 
• Tapestry consumers are young, looking to engage with the company’s brands, and not not fazed by recent price increases. 

#4 Signet Jewelers 

Signet is the parent company of jewelers such as Zales and Kay. 

Earnings: Signet beat profit and revenue estimates when it reported earnings last week. For the full year, the company increased its guidance on  both metrics. 

Signet on the consumer: Signet expects “continued pressure” on discretionary spending, due largely to inflation. Despite its concern over the consumer, it felt confident in raising guidance because of how the company is managing its business. 

#5 Movado

Movado designs and distributes watches under its own brand name as well as through partnerships with brands such as Coach, Lacoste, and Ferrari. 

Earnings: In what’s becoming a trend here, Movado beat on sales and profits when it reported earnings last month. The company held firm on full-year guidance. 

Movado on the consumer: Movado cited inflation as a concern, noting the impact it’s having on the low-end consumer, in particular. It specifically mentioned the absence of stimulus, along with inflation, as a problem for consumers. 

The Bottom Line: Our sample of the luxury landscape revealed two major themes. 

One, as the stay-at-home portion of the pandemic ended, people were spending money, reflecting pent-up demand. However, a mix of no more stimulus and inflation, is putting pressure on consumers, particularly at the low-end. Some higher-end, luxury consumers remain eager, unfazed, and resilient. 

Two, whatever the headwind, a majority of the five companies The Juice looked at are optimistic about the rest of the year because they’re offsetting any consumer weakness through nimble management of their supply chains and other aspects of their businesses. What’s happening now, they say, reflects little more than short-term obstacles to long-term narratives that remain intact.

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